Two very popular ways people save money for retirement, are Certificate of Deposits (CDs) and 401K plans.
According to Investopedia, A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements. A CD restricts access to the funds until the maturity date of the investment. CDs are generally issued by commercial banks and are insured by the FDIC up to $250,000 per individual.
CD’s are offered at Financial Institutions. Rule of thumb; the more money you save and the more time you invest, the better interest rate you will receive. For example; if you have $5,000 you would like to save in a CD for 5 years, you can receive a greater interest rate than someone saving $5,000 for 1 year. Also, keep in mind interest is calculated quarterly.
By definition, a 401K plan is an arrangement that allows an employee to choose between taking compensation in cash or deferring a percentage of it to an account under the plan. The amount deferred is usually not taxable to the employee until it is withdrawn or distributed from the plan. Since the 401K retirement plan is known as a qualified plan, it is governed by the regulations stipulated in the Employee Retirement Income Security Act of 1974.
One obstacle many people face when having a 401K through their employer, is when they may change companies. Great news is you have options!! Many Financial Institutions offer the option of a ROTH IRA, and you can simply roll those funds over without any penalties! Awesome! A ROTH IRA is an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year.
💡Something to keep in mind… Both earnings on the account and withdrawals after age 59½ are tax-free.
💡Another thing… If you are just starting out, a savings account will be best for you at your current stage of life. Saving 10% of your income will help you achieve your financial goals, and provide a soft cushion for any unforeseen emergencies.